Earnings Re-Cap: A Brutal Week And More To Come; Surving By Experimenting

This story was written by Rory Maher.
Several media companies reported earnings this week and most reports pointed to a somewhat weaker-than-expected digital media industry, but relative strength versus traditional media in a pretty gloomy economy. At this point it is clear that no one was immune to what was a steep economic slide during November, accelerating into December and January, even the fastest-growing industries, like digital. However, though digital is clearly being impacted by the economy there are some bright spots.  Here are the highlights:

Display's pain: Interactive Corp CEO Barry Diller stated display advertising at his company could be down as much as 50 percent in January, a surprisingly dire forecast. AOL (NYSE: TWX) followed that report by providing pacings that suggested display would be down 35- to 45 percent in Q1. There had been discussions through the end of 2008 that display was experiencing further weakness, but most were surprised by just how bad the environment has become. Publishers need to aggressively improve their banner offerings if they are going to at least stem the bleeding from display

Search's strength: Following Google's report a couple weeks ago that revenue per-paid-click decreased slightly in the Q4 (though increased searches drove total paid click revenue to grow 18 percent) many were waiting for IAC (NSDQ: IACI) and AOL earnings to determine if search's relative strength versus display was industry-wide or company-specific. IAC's report that search was essentially flat in Q4 and is pacing down in the high-single-digits followed by AOL's report that search was currently pacing down in the low-single-digits indicated that search is not immune from the weak economy, but the increased targeting and performance metrics are causing it to hold up better than display.

Newspapers' struggles: A common theme from newspaper companies like McClatchy (NYSE: MNI) this week was that digital results were continuing to be positive, but newspaper companies were struggling to find ways to achieve revenue growth that compensates for declines from the dismal print advertising business.  Many were openly considering charging for content as McClatchy CEO and Chairman Gary Pruitt explained in the company's earnings call : "Our cost of delivery online is lower, so the distinction between 'print is pay and online is free' is wrong. We'll experiment with paid content online." That sentiment was echoed by NYT editor Bill Keller, who wrote in a reader Q&A this week that "Really good information, often extracted from reluctant sources, truth-tested, organized and explained that stuff wants to be paid for."  However, the jury is still out about whether or not the loss of visitors and subsequent ad revenue would be made up by subscription revenue.   

Digital music growth still too slow: Warner Music Group (NYSE: WMG) reported digital revenue grew 20 prcent during Q4, accounting for 20 percent of total revenue, but was not enough to bolster an 11 percent decline in total revenue, driven by poor CD sales. The music industry should eventually stabilize and grow, but it's unlikely digital recorded music and labels' growing artist services focus will ever be as large an industry as CD recorded music was. WMG CEO Edgar Bronfman Jr. indicated he was coming around to that way of thinking when he told investors this week: "The music industry will unquestionably become a growth industry. The only question is when does that turn a curve and from what base?" 

Keep experimenting: Despite the difficulties of just surviving right now, media companies should use the current downturn to experiment with their digital business models. The economy will eventually turn around. The ones left standing, no matter the industry or category, will be the ones who positioned for the long-term and whose services took advantage of the changes that obliterated their competitors. Specifically, online publishers should get more creative with their ad offerings; record labels should continue to work with their digital partners to try different pricing and distribution models. As for newspapers, the ones who find a solution beyond advertising will light a path for the rest.


By Rory Maher
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